Why are Direct Dividend Payments so Difficult in MENA?

Submitted by Kevin Carey
On Mon, 04/07/2014

[1] As a wave of newly resource-rich countries, especially in sub-Saharan Africa, looks to the best means of managing resource wealth, one compelling recommendation has come to the fore: to distribute at least some portion of resource revenues to the public through direct dividend payments (DDPs). The case is laid out in papers published at the Center for Global Development by Todd Moss[2] and the World Bank’s Shanta Devarajan and Marcelo Giugale[3]. The DDP proposal has several foundations. Payment technology has increased the feasibility of large-scale transfers, as Alan Gelb and Caroline Decker[4] explain. There are already cases of developing countries scaling up identity card systems associated with cash transfers quite quickly. As for rationale, given the poor track record of public expenditure efficiency, especially in resource-rich countries, it seems clear that general welfare could be targeted more effectively through DDPs, and without any of the distortionary effects or distributional flaws of price subsidies. Finally, from a political economy perspective, DDPs coupled with taxation could restore the accountability of a government to its citizens, which is otherwise weakened by its ability to draw on revenues directly from the source.

Nonetheless, for now DDPs remain a rare instrument, used explicitly only in Alaska, Alberta, and with variation in Mongolia. Most of the motivating arguments for DDPs draw on the experience of general cash transfers (conditional or unconditional) which is not specific to resource-rich countries. Why then do we not see more examples of DDPs in MENA, given its considerable oil and gas wealth?

At one level, the answer is obvious. In a region of authoritarian governments, monarchies, and a statist tradition, DDPs would represent a radical change in the social contract, one which the region has been slow to absorb. The dominant model is one where the state is the provider – of jobs, subsidies, and services--and the presumption is that resource revenues are distributed by those means. Of course the leakages from this social contract are enormous, which is precisely the logic of DDPs.

More puzzling about MENA is that, even in cases where the social contract has been up for revision, DDPs have yet to emerge as a priority. For example, Iraq and Libya both have vast resource wealth per capita and could have been looking for ways to signal a departure from the past. But for now, allocation of hydrocarbon revenues is entirely through the state. Perhaps special circumstances, not least recurring crises and fragility, made these states “batten down the hatches” and stick to more conventional means of distributing rents.

Interestingly, the richer Gulf states – Kuwait, Abu Dhabi, and Qatar – have their own analogy to DDPs, which is a de facto guaranteed job for citizens (or at least heads of households), along with universal subsidies. As all the Gulf countries recognize, an over-reliance on the public sector payroll in the spending of oil revenues has distorted their labor markets, even as it has been seen as a source of legitimacy for governments.

Although the Gulf and MENA’s fragile states seem like divergent examples, there may be an underlying common factor in the reluctance to embrace DDPs. This is that the region’s governments perceive a tradeoff between state building and DDPs. Since MENA states emerged from colonial systems, governments sought to establish legitimacy partly through their own role as a provider. The corresponding risk was that DDPs might be too successful in giving citizens a stake in oil, undercutting their identification with the government.

Of course, this might be a case of paternalistic leaders overstating their importance out of self-interest. Yet it is revealing that that the two most well developed examples of DDPs – Alberta and Alaska – are subnational entities. The pure state building and state-maintaining functions are handled by the top layer of government, leaving lower layers free to pursue innovative resource-sharing strategies. A related concern may be that a state in the process of building its legitimacy has good reason to be cautious in approaching DDPs, in case some contingency necessitates that they be scaled back or eliminated. Mongolia is a good illustration of this problem, as an initial commitment driven by electoral politics to move to DDPs has been undermined by fiscal volatility and in turn led to tensions with international resource companies.

The overall point is that in advocating DDPs, we may need to validate whether resource wealth distribution can truly be unpacked from general state legitimacy. States that can sustain their legitimacy with effective performance are likely to be those most comfortable with DDPs. But lower capacity states may need some assurance that they will not be bereft of public allegiance under such a scheme. Thus, DDPs will be easier to put on the table when the state is doing other things to establish its credentials, especially in terms of improving service delivery. MENA might therefore see more DDPs if and when more states engage with the WDR 2004 – and its 10 years after[5] – agenda!